INTERNATIONALIZATION METHODS OF CIRCULAR ECONOMY PRODUCTION COMPANIES WERROWOOL OÜ AND WERROWOOL TECHNOLOGIES OÜ

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University of Tartu

School of Economics and Business Administration

Ivar Heinola

INTERNATIONALIZATION METHODS OF CIRCULAR ECONOMY PRODUCTION COMPANIES WERROWOOL OÜ AND

WERROWOOL TECHNOLOGIES OÜ

Master’s Thesis

Supervised by: Senior Research Fellow of International Business Tiia Vissak

Tartu 2020

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Submitted for defense:

(supervisors’ signature)

I have prepared the work independently. All works of other authors used in compiling the work, fundamental views, data from literature sources and elsewhere are cited.

(author’s signature)

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ABSTRACT

The aim of this research is to contribute to existing theory in terms of proposing combinations of exporting methods in line with competitive advantage building, relying on the circular economy aspects and resource exploitation as well as institutions’ recognition during the SMEs production companies’ internationalization. This paper is based on the case study of two small production companies providing valuable empirical insight through the analysis of firms´

internationalization while applying circular economy business models. The results suggest that the combination of export methods with regard to a company´s resources tends to be rather specific, influenced by the institutional context and can only be validated during internationalization and gathering both experimental and experiential knowledge.

CERCS: S180; Keywords: Circular economy, internationalization, SMEs, resource, institution, eco-innovation

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1. INTRODUCTION

The theoretical foundations of firms´ internationalization are developed continuously and reflect the changes in the environment of business relations, from the gradual internationalization model explaining the behavior of multi-national companies (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977, 2009) to the born global firms literature applicable to SMEs (Knight and Cavusgil, 1996; Sheppard and McNaughton, 2012; Hennart, 2014; Pellegrino and McNaughton, 2017; Chandra and Wilkinson, 2017; Bagheri, 2019; San Emeterio et al., 2020). These substantial theoretical sources, relevant also in the context of the current article, have been put into practice in the case studies to research how SMEs behave during internationalization (e.g. Madsen et al., 2000). Resource-based approaches are applied to examine firm-specific factors (Barney, 1991; 2001; Xiao et al., 2018) and institutions-based approaches to implement foreign market factors (Meyer and Peng, 2005; 2015; Peng et al., 2008; 2009). These approaches facilitate explaining how firms exploit their resources while focusing on competitive advantages based on companies´ growth during the internationalization (Porter, 1979; Barney, 2002; Knott, 2009; Nason and Wiklund, 2018;

Lahiri et al., 2020).

As the circular economy (CE) features are becoming dominant in the discussion in relation to the Green Economy Action Plan to tackle climate change (European Commission, 2020), it is relevant to analyze and draw conclusions how these aspects affect a company´s internationalization. CE represents the economic model, which aims to decouple business revenues and growth from the input of finite resources (EMF (b), 2015). Considering that production companies are in the focus of circular economy, it is essential to reduce research gaps about such companies´ specificities during the respective firms´ internationalization.

Research is also needed on creating knowledge and raising awareness about CE concepts (Pieroni et al., 2018; Blomsma and Brennan, 2019) among manufacturing SMEs and consumers in Europe (Ghisellini et al., 2016) in order to detect opportunities for enhanced competitiveness by firms and to facilitate sustainable consumer decisions (Iatridis and Kesidou, 2018; Garcia-Quevedo et al., 2020). Other research gaps to fill are reasons for the acceptance and rejection of firms applying CE strategies by global value chains, combining financing mechanisms and other resources while transforming to CE-based products and services, and building a systemic understanding about material loops and resource efficiency in terms of the

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regional or local industrial symbiosis (Ghisellini et al., 2016; Aranda-Usón et al., 2020). As small production companies, especially micro-companies, are not often the objects of research and in-depth analyses yet (Katz-Gerro and López Sintas, 2019), decreasing this gap in research is required as well.

The aim of this article is to contribute to existing theory in terms of internationalization methods in line with competitive advantage building relying on circular economy aspects. This article discusses also the reasons why researching the internationalization methods of circular economy companies is valuable and what the causes behind some of these methods failing are.

In the author´s point of view, applying circular economy strategies will be a cross-sectorial innovation challenge. As the theory surrounding it is being shaped in the present and the process is ongoing, case studies on small production companies could provide valuable empirical reach which can later be generalized. The companies under research in this paper, Werrowool OÜ and Werrowool Technologies OÜ, are independent, with different business models and internationalization patterns defined by the Sheppard and McNaughton (2012) visualization tool. The circular economy (CE) aspect is strongly present in both companies’

business models but in a different way, requiring a systemic analysis to understand the connections.

The current COVID-19 initiated economic crisis halted business activities in many sectors and postponed development plans, the long-term impact and perspectives are yet to be revealed. As the deficit in countries´ budgets is unexpectedly significant, governments have intervened monetarily and are expected to take fiscal measures as well. At the same time, the context of change creates opportunities for firms. Although small companies will be supported by the measures less because of their low impact, their small size enables flexibility to adapt and to implement CE-strategies based competitive advantages.

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2. REVIEW OF THE LITERATURE

2.1. Internationalization theories, gradual models, born global literature and eco-innovation context

Several drivers of the internationalization have been defined and researched, including: a) exploiting the monopolistic position where established advantages are used on foreign markets at small or no additional costs (Caves, 1982); b) firms go abroad to protect their existing markets of mature products (Vernon, 1966); c) international production moves eclectically while seeking opportunities based on location-specific elements, favorable cost-levels (i.e.

labor costs), higher or lower trading barriers and difference in delivery costs (Dunning, 1988);

d) knowledge-based business service companies seeking a competitive advantage by establishing mutually supportive interactions (O´Farrell et al. 1998); e) transaction cost theory based (Williamson, 1985) performance allows higher efficiency where the growth and control over ownerships on the international markets are dependent of the least-cost policy; etc.

One model that explains internationalization is the gradual model which suggests that firms’

international operations gradually (step by step) increase as a firm acquires additional knowledge, becomes more experienced internationally and establishes relationships beyond national boundaries (Johanson and Wiedersheim-Paul, 1975; Johanson and Vahlne, 1977).

According to this model, firms should internationalize like “rings in the water”, meaning their market knowledge grows over time step by step, bringing about a reduction in psychic distance, uncertainty and risks regarding each foreign market they would enter.

One of the central implications of the theories of Johanson and Wiedersheim-Paul (1975) and Johanson and Vahlne (1977) was that experiential knowledge enables decision-makers to perceive opportunities for consecutive business activities, and knowledge about these opportunities could serve as input for decision-making processes leading to a commitment decision (Johanson and Vahlne, 1977). In this model (Uppsala model), the authors presented knowledge change as a key factor for decision-makers accepting new risks and launching new ventures. According to this dynamic, the Uppsala model is visualized as a state and change loop. Several decades later, the authors of the Uppsala model are still convinced of its relevance as the model was revisited in the context of business networks where the recognition of opportunities translates into a company committing to a certain relationship, enabling the

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company to grow through learning and trust-building regarding their new position in the network (Johanson and Vahlne, 2009). Focusing on direct export as an early mode of low- investment entry to foreign markets, the aforementioned gradualists suggested that it mainly relies on external resources and is impacted by domestic institutions. In contrast, Lindsay et al.

(2017) indicated in their research of SMEs foreign market entry modes that the use of resources and institutions while exporting without intermediators resembles higher-commitment and capital-intense entry modes. The same authors explained this distinctness with an earlier accumulation of experience and resources, which in turn encouraged faster direct exporting, but did not necessarily result in higher commitments to a specific market.

According to critics (Oviatt and McDougall, 1994; Knight and Cavusgil, 2004), classical internationalization theories and gradual models ignored new types of business actors emerging and endeavoring to deploy foreign markets early in addition to domestic ones. Several theories emerged discussing companies even skipping the domestic phase, launching a global business from inception and achieving superior international performance.

Oviatt and McDougall (1994) offered a definition to ambitious business entities as companies that are looking to gain significant competitive advantages by deploying its resources and selling products and services in multiple countries, calling them international new ventures (INV). Further, the speed of internationalization was taken into consideration as an additional attribute, and firms realizing their global presence fast were called born global (BG) firms. A definition for being born global was suggested by Knight and Cavusgil (1996) according to the following criteria: a firm is a born global if it has a share of foreign sales of 25% or higher and has started exporting within three years after its formal founding.

According to Bell et al. (2001), for a traditional company committed only to the domestic market, after gathering sufficient knowledge, an opportunity may present itself for setting-off a fast and comprehensive internationalization. In this case by Bell et al. (2001), this company becomes a born-again international company and may also share a similar phenomenon of BGs in terms of internationalization. Differing from BGs born-again internationals have usually operated for longer, have gained a large market share domestically and are larger employers (Sheppard and McNaughton, 2012). According to the same authors, despite BGs are younger, they tend to act faster in more innovation-oriented manner and tend to be globally ambitious.

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These firms aim at their domestic market only to establish reference clients and test products, services and the marketing mix.

Several authors (McNaughton, 2003; Rialp et al., 2005) have also proposed that born global firms exploit superior technological resources by selling knowledge-intensive products and their international sales growth stems from their international orientation, marketing skills, innovativeness and market orientation as a part of their international business competencies (Knight and Kim, 2009). Furthermore, Bagheri et al. (2019) proposed a research model based on technological innovation while analyzing of SMEs in the United Kingdom and concluded that there are clear positive relationships between the international orientation of the firm (while utilizing inward and outward aspects simultaneously) and the superior international performance of the firm. These statements were opposed by Hennart (2014) who called INVs/BGs accidental internationalists (due to an equal effort needed for domestic and foreign sales) and argued that these firms do not differ from others in terms of superior technological intensity in products and services, but with regard to different business models based on low- cost information and delivery methods.

Madsen et al. (2000) conducted a study on Danish born global SMEs where the organizational structure of a BG company was described as usually rather complex, because activities on foreign markets are more complex than on domestic markets, requiring more employees and organizational support. Other authors have found, based on internationalization research on Nordic SMEs that the structural complexity issue does not manifest itself among smaller SMEs and emphasize that small companies are linked to large companies via the business networks of subcontractors in the respective industry (Boter and Holmquist, 1996).

Pellegrino and McNaughton (2017) studied how rapidly and incrementally internationalizing companies acquire knowledge and concluded that rapid firms learn about foreign markets, industry and their own products just prior to or while setting up their business abroad, relying on the networks where they belong. According to the same authors, in this way the most knowledgeable key persons in the companies, such as the founders, enable the companies to deliver novel products to international niche-markets faster, while incrementally internationalizing companies using largely an experiential way of learning needed to succeed on the domestic market and to transfer this knowledge to a foreign market. According to entrepreneur-centric research, the perception is that born global entrepreneurs are more positive

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about overcoming the barriers they meet during international market entries, they perceive more opportunities, and tend to think they are acting less risky (Chetty and Campbell-Hunt, 2004; Dimitratos et al., 2012). In addition, they also perceive that the first foreign sales was fast, and that the speed of broadening the company´s presence abroad and the speed of geographical expansion was slow (Hsieh et al., 2019). Another recent study similarly confirmed, while analyzing BGs´ and traditional companies´ internationalization models empirically, that there is complementarity between BGs and gradualist models, meaning BGs can often move to foreign markets fast after founding, but later they develop gradually (San Emeterio et al., 2020). Thus, more commitment-building activities after market-entries would be recommended.

In addition to the descriptions and attributes above, network-centric perspectives have been presented in the literature. While Chandra and Wilkinson (2017) focus on the specific network- centric internationalization perspective, they criticize earlier retrospective explanations on firms´ performance correlated with managers´ perceptions about the firms. The same authors emphasize the bias where managers´ perception about the firm is formed by the company´s current position and they do not find it relevant for the company´s learning process. Building on the foundations of networks and relationships from the incremental internationalization models (Johanson and Vahlne, 1977, 2009), Chandra and Wilkinson (2017) conceptualize these as driving companies towards better opportunities so that the firm could aim to become an “insider” to gain access to a network´s benefits. In this way, a company can overcome the liability of outsidership (Johanson and Vahlne, 2009). Based on their research, Chandra and Wilkinson (2017) found that two properties underlie the membership of a network: a) collective intelligence to identify market opportunities, b) collective capability to exploit opportunities.

Succeeding in terms of network would allow a firm to implement also intermediators avoiding strategy while entering the market, relying on firms’ earlier knowledge and resources (Lindsay et al., 2017).

It appears to be rather common that these small companies are highly dependent on the owner- manager or other senior individual, have limited resources for R&D and marketing. Due to these characteristics, the same authors suggest using a multi-level approach to understand the internationalization process of small companies on the individual, company, industry and national levels (Boter and Holmquist, 1996). In order to bridge theory with business practices,

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this paper partly covers the individual, company and industry levels to provide valuable insights into these rather complex systems. Besides that, in the context of CE firms, it is justified to inquire if there is a correlation between the degree of a firm´s internationalization and innovating with products or processes positively impacting the environment. As existing literature has essentially disregarded research on the mutuality of CE and internationalization, a wider eco-innovation context was engaged from which CE stems.

Even though the research of Chiarvesio et al. (2015) on Italian SMEs denied a clear link between companies´ eco-innovations and the export intensity, De Marchi (2012) found a correlation between a firm´s characteristics, internationalization strategies and eco-innovation propensity based on Spanish manufacturing firms. Most recently, Cavallo et al. (2020) declared, based on their single case study on an environmentally friendly bio-products manufacturing company, that overall business model innovation has a direct impact on the scale of internationalization. The latter was qualitative in-depth research, while the previously mentioned ones were quantitative and based on great samples. Despite conflicting conclusions, Chiarvesio et al. (2015) concluded that the sample firms were more eager to invest in eco- innovations if their supply chain partners belonged to their region. Such locality was explained by the recognition of integrity among the supply chain partners, meaning change making would be more effective and better perceived by customers (Chiarvesio et al., 2015).

According to Beise and Rennings (2005, p.6), environmental innovation is defined as: “new or modified processes, techniques, practices, systems and products to avoid or to reduce environmental harms.” Based on neoclassical contributions to innovation literature, environmental innovation differs from other types of innovation in terms of externalities and drivers (De Marchi, 2012). The same authors add that although the knowledge externality is shared by both, the environmental externality provided by innovators creates environmentally positive impacts, which will be partly shared with the society.

Project business as a special type of firms is defined by Owusu et al. (2007) through relationships between the manufacturer/seller and purchaser as well as other stakeholders involved in one or several projects between the organizations. Project business is distinct as each project is independent, rather unique, complex in structure (technologically and organizationally) and temporary in duration. Despite the latter, long-time relationships may occur, continuous cooperation and knowledge acquisition can take place (Owusu et al., 2007).

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Despite these specificities, the project business type has attracted criticism as the boundaries of project business are hazy. Such a classification could only be used in cases where the projects are inseparable from the company´s focal business-line. Additionally, little research has been conducted on the applicability of project business to small companies.

Based on risk taking, the level of accumulated knowledge and the level of investment, gradual models which are introduced in this sub-chapter successively apply the following company- level internationalization methods established by Johanson and Wiedersheim-Paul (1975): a) irregular or sporadic export activities, b) export through independent representatives (direct or indirect agents), c) exports through foreign sales subsidiaries or joint ventures, d) foreign production units or contractual relationships (e.g. franchizing). According to the Uppsala model, these methods are taken by companies step by step but it does not apply to born global firms. Relying on the versatile typology about the BGs proposed by Vissak and Masso (2015), firms are considered to skip one or several steps in this succession, to use several methods simultaneously or in a different order and occasionally to repeat the steps, as firms´

internationalization process is not considered to be straightforward based on the research of Estonian companies´ by these two authors. An overview of the internationalization literature mostly applied in the current research is summarized in Table 1 where representatives of gradualist models, born global and eco-innovation literature are presented according to the main findings.

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Table 1 Internationalization literature applied in the research Gradual models Generalized findings

Johanson and Wiedersheim- Paul, 1975; Johanson and Vahlne, 1977; 2009

Defined the model of gradual foreign operations, presented firms´ focus on the commitment to opportunities and updated its focus on firms´ network commitment, which is based on the loop of learning respectively Born global literature Generalized findings

Knight and Cavusgil, 1996;

Bell et al., 2001; Sheppard and McNaughton, 2012

BGs with its characteristics and born-again internationals as special cases with rapid and dedicated internationalization defined. Complemented with differentiated attributes of BGs and born-again internationals in terms of size, age and globalizing patterns supported by the domestic references for born- again internationals

Hennart, 2014;

Bagheri, 2019

Accidental internationalization by BGs is based on initial and fast expansion, advanced business models and advanced combination of non- tangible resources, including superior performance based on technological innovativeness

Pellegrino and McNaughton, 2017; San Emeterio et al., 2020

Coincidental learning by BGs while internationalizing and experiential learning by gradually internationalizing companies introduced. Partial complementarity between BGs and gradualists detected: BGs start to internationalization fast but tend to continue gradually

Boter and Holmquist, 1996 Madsen et al., 2000

BGs are expected to increase organizational complexity while

internationalizing, collaboration with local firms was suggested to reduce initial investments. SMEs and micro-companies are suggested to connect with large companies via their subcontractors´ network.

Chandra and Wilkinson, 2017

Using intermediators´ avoidance entry mode requires earlier knowledge and resources. Deficit in this matter may evoke the liability of outsidership. The solution suggested includes mode adequate perception of the relationships network

Eco-innovation and project

business literature Generalized findings

De Marchi, 2012 Chiarvesio et al., 2015 Cavallo et al., 2020

Opposite results were introduced about the nexus between eco-innovations and export intensity, while business model innovation impact to the scale of internationalization was confirmed by some authors. Also, firms characteristics, internationalization strategies and eco-innovation propensity are considered interdependent

Owusu, 2007 Project business has a temporary, rather unique and complex nature in terms of organizational structure

Based on the theories above, the author of this article argues that the explanations regarding the internationalization process of SMEs are ambiguous because of the abundance of factors and relativity. There is agreement in the literature that knowledge, networks and commitment are dynamic variables of this entrepreneurial equation, also that business model innovation (incl. eco-innovations) should be a persistent process. The case study based dynamic relationship between concepts’ development over the last decades is noticeable as each one contributes to the development of the theory. For instance, Johanson and Vahlne were developing their model from firms´ opportunities commitment (1977) to firms´ network

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commitment (2009) based on the loop of learning; and Pellegrino and McNaughton (2017) specified that organizations may have different sources of learning affecting the pace of internationalizing. In addition, the internationalization scale may be impacted directly by the attitude of a firm´s continuous business model innovation.

2.2. Resource- and institution-based view

The resource-based view (RBV), grounded in the competitive advantage theory (Porter, 1979;

1980) and the price elasticity of supply theories, is a suitable approach for determining and handling a bundle of company specificities. As a major contributor to the theory, Barney et al.

(2001) explained that RBV helps to specify the resources required to overcome the liability of foreignness, to investigate the resources defining the product and to enable international diversification.

The economic and strategic value of companies´ tangible assets (financial and physical capital) and intangible assets (human and organizational capital) varies and these resources are only valuable when they enable a firm to implement strategies lowering its costs or increasing its revenues (Xiao et al. 2018). The RBV logic assumes that companies are profit-maximizing entities, managers have bounded rationality and different firms may possess different combinations of heterogeneous resources, experiencing occasional scarcity, which can remain over time and are non-substitutable (Barney 1991).

A widely known method for assessing value-rarity-inimitability-organization (VRIO) was proposed by Barney (2002), originating from his theory developed in 1991. This method is often criticized because of its complexity in attempting to transform theoretical concepts into practical guidelines (Knott, 2009). The current author suggests that after adopting this technique, the user should follow their own interpretation based on their understanding, previous knowledge and systemic view, and in this way design the suitable practice. In order to fill the gap, Knott proficiently demonstrated a practical example on the RBV with an enhanced and extended VRIO analysis, which resulted in two main implications: a) delineating a specific set of practices relating to the dynamic capability to manage resources and competences, b) presenting resource-based theory in a form that focuses on the building of strategy instead of the traditional focus to determine a firm´s performance (Knott, 2009).

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Nason and Wiklund (2018) have recently contributed to the lines of theory comparing VRIO and the Penrosean versatile method in order to validate, which is a better source for a company´s growth. Quoting the same authors (Nason and Wiklund, 2018, p.33) about the approach to the VRIO method, “extant RBV research builds on the implicit assumption that growth and competitive advantage are concomitant”. Subsequently, the authors dismiss the assumption with the support of a meta-analysis and show it is not always the case and that instead the Penrosean characteristic¹ of resource versatility is linked with a higher level of company growth (Nason and Wiklund, 2018). The current author agrees with this kind of versatility keeping in mind that the continuous shaping of a firm´s competitive advantage is in the focus of RBV. Also, the current research explores if eco-innovations would support achieving it, while connecting a firm´s internal and external resources. Based on De Marchi’s (2012) research, suppliers and scientific agents stand out as more important partners during environmental R&D cooperation than in case of other innovation. The same research confirms theories that in the development of eco-innovations, the presence of technological interdependencies on knowledge, skills and resources are asserted (De Marchi, 2012). Based on that, building knowledge intensive competencies may prompt firms to engage partners to a greater extent due to the complexity.

The institution-based view (IBV), more recent than RBV, is considered to be an emerging economy-based branch of business research, which focuses on the interaction between economic actors and institutional environments (Meyer and Peng, 2015; Meyer and Peng, 2005; Peng et al., 2009; Peng et al., 2008) where institutions are defined as a bundle of formal and informal habits, rules, values and regulations configuring how transactions are executed on a specific market. IBV is built on two core propositions: 1) managers and firms follow their interests and execute decisions from a bounded rational choice perspective in order to reduce uncertainty within a given institutional environment; 2) the firms´ behavior is based on the combination of formal and informal institutions (Peng et al., 2009).

1 The Penrosean theory stands for: “the productive opportunity set of the firm, which comprises all of the productive possibilities, that its entrepreneurs see and can take advantage of” (Penrose,1959/1995, p.28).

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The IBV was initially engaged in the research of multi-national enterprises (MNEs) of emerging economies and later came in the focus of SMEs. It accompanies the internal growth of an entrepreneurial environment where companies of emerging markets are considered to be in the stage of entering foreign markets (Meyer and Peng, 2015) for exploiting the potential of products or services. In terms of innovation drivers supporting that growth (mentioned in sub- chapter 2.1), additionally to demand-side pull and technology push known from overall innovation theories, which can be described also as institutional ones, regulatory push/pull factors induce innovation (Rennings, 2000). Lahiri et al. (2020) examined internationalizing family SMEs and claimed that institution-based contingencies are continuously emerging. At this point, companies are engaging with different sets of potentially conflicting institutions at multiple levels and in various locations (Meyer and Peng, 2015). For coping with these changes, the same authors suggested incentivized programs backed by governments helping SMEs to overcome international challenges and ensuring institutional investors’ support addressing the “smallness” challenge in this way (Lahiri et al. 2020).

The review of the respective literature and connections to this sub-chapter are summarized in Figure 1, which is completely designed by the author.

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Review of the literature regarding the resource- and institution-based views

Considering the impact of the current economic crisis, the state of the European Union’s legal environment being in transformation due to the Circular Economy Action Plan (European Commission, 2020) and other drivers, established institutions find themselves in the context of change. The crisis-handling mechanisms, mainly decided by each member state individually, with the European Commission accepting some fiscal loosening and monetary leverage provided by the European Central Bank, will have a direct impact on how companies perceive and manage the institution-based change. Although addressed very heterogeneously by businesses in different member states until now, the change context may prompt companies to redefine strategies towards environmental and economical synergy more broadly. Additionally to targeted investments, it would require knowledge acquisition through cooperation across sectors to innovate business models and realize the potential of sustainable competitive advantage.

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2.3. Circular economy and related literature

Based on the author´s opinion, the momentum of recovery from the actual economic crisis pulls decision-makers towards the “old normal”, as it seems secure primarily for major asset-owners.

Nevertheless, it would be more proactive to direct the recovery towards the “new normal”, since due to a full-scale change in the demand in several industries the aforementioned institutional situation is bound to change. The “new normal” would stand in the full compliance with the strategies aimed at achieving climate neutrality.

Social movement towards sustainability in accordance with the circular economy (CE) approach enables a significant change in the economic system and it needs immediate preliminary actions and a stronger commitment from countries as the macro-level (EMF (a), 2015; Ghisellini et al., 2016). On the system´s micro-level, companies apply CE principles which embrace business activities oriented at closing the loop of material usage while preserving economic efficiency. The ultimate goal of CE is to decouple business revenues and growth from the input of finite resources (EMF (b), 2015). This means that converting waste into input minimizes the need for virgin raw materials. Achieving this goal contains complexities necessary to be considered to enable transition and to ensure socio-economic support, as reducing resources use would not always prompt an increase in resource use efficiency (Ghisellini et al., 2016).

Major concepts and frameworks related to CE emerged already in the 1970s but gained recognition only in the 1990s (EMF (b), 2015): some the most prominent of those to be mentioned are the ReSOLVE framework by McKinsey & Company (EMF (b), 2015), the

“cradle to cradle” product design (McDonough and Braungart, 2003), industrial ecology (Lifset and Graedel, 2001) and blue economy systems approach (Pauli, 2010). Industrial ecology also comprises industrial symbiosis, which is considered to be a set of high-level collaborative activities between firms oriented at sharing resources to avoid waste (Aranda-Usón et al., 2020). Based on numerous case studies, the potential for applying industrial symbiosis is considered enormous both in the manufacturing sector and elsewhere (Neves et al., 2020).

Several recent studies have indicated that eco-innovations in the form of environment management systems (EMS) have been motivated by substantive awareness, as such systems are considered to increase efficiencies and to enhance simultaneously firms’ international competitiveness and reputation (Iatridis and Kesidou, 2018; Garcia-Quevedo et al., 2020).

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Despite the level of awareness and consideration that EMS are ubiquitous and first in line activities for manufacturing companies, a surprisingly small number of firms have implemented those. For instance, according to a study by Garcia-Quevedo et al. (2020) among 16 manufacturing sectors of Spain, only 13.5% have implemented ISO 14001 and less than 1%

the Eco-Management and Audit Scheme (EMAS). Consequently, despite many CE concepts and frameworks (e.g. those mentioned in the previous paragraph) being well-acknowledged, learning about the integration of actual CE principles into firms´ business strategies is complicated because of a limited sample of companies applying these purposefully; hence, there are only a few studies available (Katz-Gerro and López Sintas, 2019). To fill the gap, the two authors mentioned conducted a geographic location based research among SMEs of several EU member states and resulted that the chance to implement CE-activities is highly dependent on previous experience of CE-implementation and on organizational properties.

For determining the current position and to monitor the progress of secondary manufacturing companies in adapting CE principles, the Circular Economy Index (CEI) methodology was proposed by DiMaio and Rem (2015). As the current European Commission policy (European Commission, 2000) does not foster value-based material recycling, a new index was proposed to address the complexity and align with more ambitious environmental policies; resulting in the ratio between the recycled materials’ input and output values (DiMaio and Rem, 2015). In other words, DiMaio and Rem (2015) argued that the CEI stands for the ratio between the gross-value added (GVA) and the material input value.

Blomsma and Brennan (2019) using the systems thinking approach towards CE proposed Circularity Grid tool to visualize company CE-processes in the context of coupling and on different system levels. More specifically, it offers a 2-dimensional view of the relationships between the company system components where dependencies, infrastructures and knowledge requirements, costs and risks are coupled (Blomsma and Brennan, 2019). Manufacturers owning an independent product portfolio with supplementing services, defined as product/service-systems (PSS), appear to represent opportunities for the application of one or several multiple strategies (Pieroni et al., 2018), while moving from linear resource consumption towards a circular one. According to the same authors, PSS-firms tend to approach their activities holistically, as they are able to combine resource effective strategies

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with overall resource efficiency (Pieroni et al., 2018). In this study’s context, PSS-features were incorporated into the Circularity Grid tool application.

The most prominent literature in the context of the current case study mentioned in this sub- chapter is outlined in Table 2 based on recommendations presented in Vissak (2020).

Table 2 Review of the significant literature regarding circular economy and eco-innovation Study Context Data and methods Findings

Ghisellini et

al., 2016 Comparison of literature regarding implementations of China’s CE with the applications in Europe, Japan and the world

Literature searches, selection and grouping;

investigating two focus groups across three scales

Strong commitment and immediate action required in the CE on the country level;

increasing resource efficiency presumes a systemic overview to avoid contradictory results; CE applies to steady-state oriented economic systems, not to growth

Aranda- Usón et al., 2020

Cross-sectorial regional

measurement of CE activities in Spain

Qualitative analysis;

selecting CE-related activities with a four- level classification;

semi-structured interviews and questionnaires

It cannot be confirmed if the CE is being adopted by firms with the principal aim to close material loops as few companies have advanced to a higher level of activity groups

Blomsma and Brennan, 2019

Circularity Grid tool to visualize relationships

Systems thinking approach; case studies, semi- structured interviews

Solution provided for understanding the system components and relationships on different levels while applying CE strategies Pieroni et

al., 2018 Product/service systems’ (PSS) relations to circular strategies

Retrospective case study: nine cases supported by the CIRCit database and exploratory analysis

PSS firms appear to be favorable for the application of multiple circular strategies;

PSS firms tend to combine resource efficiency and resource effective strategies DiMaio and

Rem, 2015 Circular Economy Index (CEI) for the circularity

adaptation level

Experiential research;

financial calculation methods

Simple and robust CEI methodology introduced to foster value recovery policies where the gross value added to secondary resources is highlighted

Katz-Gerro, and López Sintas, 2019

Analysis of EU SMEs to research the level of engagement in CE activities

Quantitative analysis

on survey-based data The success of a particular CE activity implementation is depending on the previous experience acquired while implementing earlier CE-activities and the patterns are connected with SMEs organizational properties

Iatridis and Kesidou, 2018;

Garcia- Quevedo et al., 2020

Eco-innovation in the form of environmental management systems deployment

Econometric analysis; panel data from 16

manufacturing sectors in Spain

More frequent eco-certification adopters come from sectors with the stricter

environmental policy and export orientation, also that firm size drives the adoption

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Considering closing material loops as the objective of CE, it is essential to specify business activities and to treat them as milestones in the progress towards circularity and managing complexity. For that purpose, four levels of activities were proposed by Aranda-Usón et al.

(2020) which on the entry-level are related to recycling and energy efficiency and are often known to companies, while changes related to dematerialization, renewables and secondary raw-materials forming the second level demand much more awareness and actions. On the third level, activities related to eco-innovations and eco-design are set; and finally, industrial symbiosis and other collaborative circular activities are defined on thefourth level as the most advanced CE practices met by few companies (Aranda-Usón et al., 2020).

In summary, an early engagement with CE by the firm is not yet regarded as a competitive advantage in the literature, albeit eco-innovation strategies in general being better correlated with it in the context of internationalization. As De Marchi’s (2012) study (referred in sub- chapter 2.1) concluded, company size determines the propensity for eco-innovation and firms that are previously familiar with new products and processes are more eager to implement eco- innovations as well. It seems that experiential (gradual) and experimental (learning in the process) ways of learning and acting may both describe the internationalization and CE transformation of a firm.

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3. METHODOLOGY

3.1. Selection of methodology

In this chapter, the form of research, methods used and choosing the targets of the case study will be explained. The author explains the decisions and choices made, compares alternatives and presents methods for data collection and analysis. Despite the structure of the article following the example of a research article, the author attempted to maintain his personal style of comprehensive writing in line with the research interests, empirical field and target audience, as suggested by Jonsen et al. (2018).

In order to find answers to questions presented in the introduction, a qualitative multiple case study (Yin, 2003) was employed to examine which methods of internationalization apply to small circular economy production companies. That is, to explain how circularity affects the process and what could be contributed to the theory. Vissak (2010) advocated for the relevance of case studies when conducting research on international business as the studied processes are often dynamic and the phenomena are impacted by the country or culture specific characteristics; and the richness of results might not fit into any model. The same author counterbalanced her statement by pointing out that authors may face the risk of losing objectivity or conceal some of their results, which do not comply with the main conclusions of the research (Vissak, 2010). As location-based and cultural phenomena dynamics were experienced during the research, the author of this paper agrees with Vissak (2010), acknowledging also the warnings which are mainly the subjects of researchers´ ethics.

Yin discussed different designs for case studies (Yin, 2003): a single case, a single case with embedded units and multiple cases. The author of this article decided that understanding the context is the most important parameter when choosing a convenient design. While a single case focuses on a clear and specific situation, a single case with embedded units allows to explore several sub-units of the population (i.e. groups of people, organizations) either within each sub-unit, between several sub-units or across all the sub-units, but all of these are a part of the same unique context (Baxter and Jack, 2008). Therefore, relying on Yin (2003) as well as Baxter and Jack (2008), the current author selected the multiple case study method as the most appropriate for this paper.

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3.2. Choosing case study objects

Choosing the case study objects (companies) was simple and challenging at the same time. The circular nature of the businesses WW and WWT has been widely discussed in recent years ((DiMaio and Rem, 2015; Ghisellini et al., 2016; Pieroni et al., 2018; Blomsma and Brennan, 2019; Katz-Gerro, and López Sintas, 2019; Aranda-Usón et al., 2020) and will be continued in the immediate future due to the all-embracing climate change context. There are only few circular and in economic terms sustainable manufacturing businesses that have appeared in Estonia during the last decade, keeping the sample small to choose from. Whilst the author has a history of founding such companies, the choice was made in favor of these two because of access to trustworthy and sufficient information, keeping in mind the bias that might leave the author exposed to risks. Presumably, every researcher focusing on analyzing emerging phenomena face challenges concerning a limited sample. Another aspect in relation to this is the vitality and credibility of the businesses under investigation, especially while focusing on the small companies. However, the author was persuaded by purposeful sampling to ensure multiple data resources, as qualitative inquiry usually has an in-depth focus, meaning that relatively small or unique samples are selected for the analysis purposefully and the aim is to select potentially information-rich cases (Patton, 2015). Therefore, due to the author´s position (discussed in Chapter 5) and the narrow sample of circular economy companies in the area of interest, the selection was extremely limited. WW and WWT were selected as both conducted business in international terms, thus contributing essential data to the research.

All methodological details discussed in this chapter are captured in Figure 2 (compiled completely by the author) to provide an overview.

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Overview of the research methodology

3.3. Data collection and the methods of analysis

While designing and implementing the current case study, some additional components were incorporated into the research context: a) the development of research questions, b) the application of the conceptual framework (Miles and Huberman, 1994), c) the criteria for interpreting findings (Yin, 2003). As Baxter and Jack (2008) note, the goal of the conceptual framework is to support the researcher: whom to engage in the research, which relationships to present based on logic, theory, experience and where to gather general constructs. To balance the dominance of such as deterministic patterns and generalizations, the tendency towards post- framework qualitative research was discussed by Jackson and Mazzei (2012), which leaves more room for open discussion. Therefore, according to Patton’s (2002) sets of criteria for judging the quality and credibility of qualitative inquiry, the current research draws the most connections with the Constructivist criteria such as acknowledged subjectivity, trustworthiness, praxis and a deepened understanding. In addition, triangulation was applied to reduce cultural factors to increase the validity of evidence as suggested in the literature (Yauch and Steudel, 2003).

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While considering the methods of analyzing the results of the current multiple case study, it was appropriate to choose between inductive and abductive approaches. While inductive reasoning aims to contribute to concept-building and complementing existing theory with the support of rather complete and valid data (Gioia et al., 2013), abductive reasoning with incomplete data sets on hand uses intuition and creativity more, leaving more space for bold and less rigorous concepts to be posed. As Michailova et al. (2014) argue, the disruption in the relationship between the researcher and the informants is necessary to provide the irritant for abductive research and abstraction for theorizing. Based on that, the current author acknowledged that the aforementioned disruption was not sufficiently ensured due to the researcher´s roles as explained in the study limitations (Chapter 5).

The general strategy used for the analysis is closest to Yin´s cross-case synthesis (Yin, 2003) as the current case study concerns two different cases which do not overlap much and are more spread over a period of time (one is very recent and the other has a longer history). Overall, Yin suggests continuously reflecting on basic distinctions in the design of the research and analysis (Yin, 2003). In the following chapter, companies are introduced at first by providing general information in Table 3 and a chronological grouping of Werrowool OÜ´s exporting activities and outcomes (see Table 4). Thereafter, significant insights from both companies were combined for comparison and analysis as suggested by Shepherd and Wiklund (2019), to enable readers to better assess the nature of the research or to use the data potentially for reanalyzing, hence the results are presented in tables and referenced. For that reason the current author took a groundwork set by Gioia et al. (2013, p.20) as a model to compose Table 5: “The features that enhance qualitative rigor actually begin with our approach to analyses, especially in terms of organizing the data into 1st- and 2nd-order categories to facilitate their later assembly into a more structured form”, where the 1st order category defines informant-centric terms and the 2nd order category researcher-centric concepts, respectively (Van Maanen, 1979).

Several qualitative methods were used for the research: participant observation (the author´s own position), interview and case survey (project leader of the main customer organization) in WWT´s context and participant observation (the author´s own position from 2007-2017), interview and case survey (the current CEO of the company) in WW´s context. The interviewees were selected as the most informed persons in the organization about

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internationalization and circularity matters. The validity assessment in this regard came from the researcher acting as a participative observer and a former insider. At first, semi-structured interviews with open questions were held, allowing to go deeper into detail, followed by survey questions asked from the same interviewees to assess certain factors and to make the results comparable for a better discussion. The interview regarding WWT was conducted via Skype due to the interviewee´s geographical location and the interview regarding WW was made vis- à-vis. Both interviews were recorded and transformed into transcripts.

The qualitative research was enriched with some quantitative data sources. The company documents and data (financials, ISO-standards, environmental statements) were used as valuable sources of specific information. The companies´ background information was gathered from their websites and public online databases additionally to the researcher´s own knowledge.

Insights from some other case studies were included, lines to internationalization and circular economy theories drawn and the discussion was built for answering the posed research questions. The aim of the selected methodology was to enable a contribution to supplementing theories.

The following chapter provides the analysis, results and discussion. Finally, conclusions, implications, limitations and further research opportunities are proposed.

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4. ANALYSIS, RESULTS AND DISCUSSION

4.1. Introduction of the companies

Two Estonia-based privately held companies are the objects of the conducted research. Both companies have partly overlapping ownership but different activities in terms of vertical sectorial hierarchy. The difference in the author´s roles in the companies was explained above.

Werrowool OÜ (WW) was established in 2007 for importing constructional insulation material to the Estonian market. After four years, the company was transformed into a company manufacturing constructional insulation material. The main reasons were the limited growth and low added value potential of business while importing.

WW initiated its manufacturing activities in Antsla, Estonia in Q4 2011 while owning tangible assets in the form of production machinery, raw-materials and a stock of products in Antsla and on its partners´ premises in Estonia and abroad.

The focal production article of WW is loose cellulose insulation. The value proposal of the company is to offer the most human and environmentally friendly energy efficiency as an easily accessible product and service mix for private households with the shortest ROI (return on investment).

WW stands out from manufacturing companies based on its application of circular economy activities. The following intermediate and high-level CE-activities are applied in the production and service systems: design for resource efficiency, design for resource recovery, recycled raw materials usage, product-life extension, design for upcycling (upgradability and multi- functionality), eco-innovation, internal-recycling, energy waste recovery and industrial symbiosis (Aranda-Usón et al., 2019). The production process of WW follows the closed-loop strategy where production inputs leave zero or minimal waste for disposal. Accordingly, WW products made of recycled paper extend the life-cycle of the material by decades and their functional value may be restored even later. Also, no packaging materials without direct or secondary recycling options are used. According to the waste permit reports, at least 70% of product packages sold on the domestic market (Estonia) to B2B customers was returned to the manufacturer and was internally recycled in the production process. Although CEI is primarily the recycling facility targeted index (Di Maio and Rem, 2015), using it in the WW context is

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justified, as based on the financial accounting reports 85% of the input flow contains recycled paper and cardboard. Accordingly, the product’s output market value GVA of WW products exceeds the value of the recycled raw-material input price by three times, which is a notable result compared to alternative usages of recycled paper and cardboard.

Products are mainly installed by B2B customers throughout the WW network in Estonia and on foreign markets. Based on the financial reports, this kind of partnerships are responsible for 85% of the sales turnover, leaving 15% of sales to end-users by re-sellers. The by-products are either sold directly to end-customers as low-degree insulation materials or as secondary sources to other companies in the industry as part of industrial symbiosis.

WW production systems and management systems are ISO 9001:2015 and ISO 14001:2015 certified, obtained in February, 2012 and in May, 2014, respectively. WW´s production and environmental management systems earned high-level recognition from the government of Estonia and by the European Commission in 2014.

Werrowool Technologies OÜ (WWT) was established in 2018 with the perspective to start building small-scale cellulose insulation production lines (to manufacture the same products as WW). WWT’s activity is performed on the sub-contractor´s premises by sub-contractors under the WWT´s management and expertise, completing its first order in 2019 relying on this flexible form of outsourcing operations. The current economic crisis has halted the activities of WWT.

The CE context of WWT is determined through the supply of technology to highly circular WW-like companies. Primarily, from the point of view of the industrial process, WWT complies with the design for resource recovery, product-life extension, eco-innovation as the criteria from CE-related activities (Aranda-Usón et al., 2019).

Based on participant observation, the initial impetus for founding WWT came via an international network, the European Cellulose Insulation Association (ECIA). The call for joining an international project of the European Union for exterior activities in the Kingdom of Jordan (Jordan) came from the Italian non-governmental organization Istituto per la Cooperazione Universitaria Onlus (ICU), leading the project. A supply gap in micro- production machinery also favored this business opportunity.

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The value proposal of WWT is to offer mobile micro-production machinery for the recycling of waste paper materials with operational and end-product marketing trainings supporting the company-level transformation towards CE.

More detailed business information about both companies is presented below in Table 3.

Table 3 Information on case study companies

Werrowool OÜ Werrowool Technologies OÜ

Founded 2007 2018

Location Antsla, Võru County, Estonia Antsla, Võru County, Estonia Activity Manufacturing cellulose insulation Manufacturing paper recycling

equipment Activity until Q4, 2011 Cellulose insulation import and sales n/a

No. of products 4 1

Product list

Cellulose insulation (newspaper) Custom-made electromechanical equipment

Cellulose insulation (cardboard) n/a Separated by-product (newspaper) n/a Separated by-product (cardboard) n/a

B2B sales 85% 100%

Year Turnover (eur) / export share Turnover (eur) / export share

2012 195,100 / 10% n/a

2013 337,974 / 11% n/a

2014 424,133 / 17% n/a

2015 421,219 / 21% n/a

2016 503,283 / 27% n/a

2017 641,405 / 31% n/a

2018 762,853 / 43% n/a

2019 767,472 / 41% 206,695 / 100%

Export markets Latvia, Lithuania, Finland, Denmark,

Sweden Italy, the Kingdom of Jordan

Certificates ISO 9001:2015; ISO 14001:2015 n/a Recognitions The most environmentally friendly

company in Estonia in 2013 n/a

European Business Award for the Environment Management Award

2014/2015 n/a

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4.2. Internationalization activities and outcomes

In sub-chapters 4.2 and 4.3 export activities and outcomes of the case study companies are introduced, followed by the discussion in sub-chapter 4.4.

The WW´s niche-market oriented business plan anticipated 66% export sales from the beginning in Q4 2011. The internationalization of WW was strategically vital from the start and there was certainty among the founders that the domestic market will be secondary and fast growth will come from export markets such as Latvia (50% of the total revenue) and Finland (16% of the total revenue). The focus of foreign markets was on Latvia, Lithuania and Finland due to logistic restrictions, as the product has high volume in space but low value in financial terms.

The basis on which WWT founded was WW´s experience and its activities were completely oriented at foreign markets. WWT is a part of the same sector´s value-creation axis but towards the higher end. By value, the author refers to the economic value in the CE-context.

The main activities of WW internationalization carried out over several years were identified and divided into four timeframes as shown in Table 4 based on a retrospective analysis by the author and contemporary contributions from the current CEO (Gioia et al., 2013). The following methods of export were used in 2012-2019 (listed according to descending transaction costs):

 Direct export B2C sales to non-recurring end-customers (high transaction costs),

 Direct export B2B sales to professional installers (medium transaction costs),

 Export B2B sales to retailers (low transaction costs),

 Export B2B sales via an agent: transforming a key customer into a local distributor (low transaction costs).

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Table 4 The internationalization activities and outcomes of Werrowool OÜ

Years Internationalization activities Internationalization outcomes 2012-

2013 Approaching cellulose insulation installation companies (B2B) directly mainly in Finland and Latvia

No recurring B2B customers (installers) engaged

Attempting distributor engagement in Latvia, offering credit for stored goods - focusing on the dominant trading company in the sector (forecasted 50% of sales from Latvia)

Distributors´ engagement was based on a false assessment and attempts failed, resulting in a great volume of unrealized foreign sales

Releasing the localized minimum viable packet for marketing channels to attract foreign B2B interest

Unsatisfying foreign interest achieved among B2B customers: 2012 - 10% of the sales (6% Latvia, 4%

Denmark), 2013 – 11% of the sales (Finland) Becoming a co-founding member of the

European Cellulose Insulation Association (ECIA)

Industry-level knowledge acquired about the challenges ahead and the sectorial network initiated 2014-

2017 Continuously searching for cellulose insulation installation companies (B2B) in Finland, Latvia and Sweden by attending trade fairs, using online channels, offering trial discounts

Effective growth in foreign sales from 72,000 euros in 2014 to 200,000 euros in 2017, based mainly on Finland and Lithuania.

Searching for key distributor engagement (B2B) in Latvia, Lithuania and Finland, offering credit for stored goods

Key distributor found and engaged in Lithuania in 2014, culminating in a 19% share in WW´s total sales in 2016. No results in other foreign countries in this field

Striving to achieve Finnish customers´ loyalty for recurring purchase orders

2014 as the most diverse year: serving six foreign markets, but no customer loyalty achieved from the Nordic countries

Contributing to ECIA membership for the European Union standardization of cellulose insulation products

Postponed decisions about the European Union´s standardization of cellulose insulation products 2018-

2019 Low-price policy when re-entering Finland where the product category is well-known but WW has not succeeded in establishing sustainable relationships

Low-price policy re-entrance to Finland rejected due to the major liability of foreignness met Re-internationalization to Latvia realized, since the key distributor approached since 2012 was at last engaged

2020 Managing the plummeting demand by promoting a new cost-efficient product even more and educating customers in the midst of an economy crisis triggered by Covid-19

70% fall in foreign and domestic demand brought about by the COVID-19 crisis. Fortunately, it occurred during the sectorial off-season (Q2)

WW with a business model in place is a regional player and has its home market in Estonia.

The manufactured end-products or by-products have to be land-transported to the next location, be it a mid-customer (professional installer, re-seller), DIY (do-it-yourself)-customer or by- product customer as a part of industrial symbiosis: the value creator applies its technological capacities to add further value (Aranda-Usón et al., 2020). Due to the costly delivery component, the market area is determined regionally. Accordingly, neighboring countries are in the focus of export, while sales to retailers has the most prominent share with 65%, followed by direct export to professional installers with 25% and 10% direct export to non-recurring